Presenting a live 90-minute webinar with interactive Q&A Commercial Mortgage Modifications: Lien Priority, Title Insurance and Bankruptcy Issues Structuring Modification Agreements While Avoiding Legal Pitfalls TUESDAY, SEPTEMBER 25, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: David R. Brittain, Partner, Trenam Kemker , Tampa, Fla. Anthony A. Arostegui, Partner, Nossaman , Sacramento, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Commercial Mortgage Modifications: Lien Priority, Title Insurance and Bankruptcy Issues Structuring Modification Agreements While Avoiding Legal Pitfalls 5
Commercial Mortgage Modifications: Lien Priority, Title Insurance and Bankruptcy Issues Loan Modification Objectives and Current Trends September 25, 2012 Anthony A. Arostegui Nossaman LLP, Sacramento, California aarostegui@nossaman.com 916.930.7748 6
Popular Objectives With Loan Modification: • A. Extending Maturity Date; Extension Options B. Adjusting the Loan Amount/Principal balance C. Changing the Interest Rate D. Revising Payment schedules and amounts E. Adding or Releasing Security/Collateral F. Modifying Disbursement Provisions to Restart Construction Project 7
Preliminary Analysis for Loan Modification Request: • Step 1: Determine Loan Status and Goals • ― If default was beyond the borrower’s control, it may be worthwhile for lender to work with the borrower ― If fault lies with the borrower, leaving the borrower in control may not be an option ― What are the benefits of modification (either short or long term) ― Review long term market conditions ― Assess risk of lender liability and proper course of action (good faith and fair dealing, written notices, opportunity to cure, etc.) 8
Preliminary Analysis for Loan Modification Request (continued) • Step 2: Assess Value of Collateral and Market • ― Inspect to assess physical condition ― Obtain an appraisal or broker’s opinion of value (BOV) ― Review marketability of collateral ― Review leasing market ― Understand borrower’s prospects of project disposition ― If project generates income, assess timing for obtaining control over funds ― If the loan is over-secured, lender may be more inclined to work with borrower 9
Preliminary Analysis for Loan Modification Request (continued) • Step 3: Review Legal Documents • ― Confirm completeness of loan documents ― Assess any defects in loan documentation (guaranty validity, etc.) ― Confirm proper perfection of lender’s lien ― Perform overall audit on loan 10
Preliminary Analysis for Loan Modification Request (continued) • Step 4: Evaluate Problems With Exercise of Remedies • ― Mortgagee-in-possession ― Mechanic’s, judgment, tax or other liens ― Feasibility of operation of project by the lender ― Environmental issues ― Likelihood of success of modification 11
Preliminary Analysis for Loan Modification Request (continued) • Step 5 : Assess Borrower’s (and Guarantor’s) Capabilities and Resources • ― Financial resources ― Replacement of operator, tenant or franchisor ― Management skills ― Reputation, honesty and responsiveness to lender’s requests (for example, assess if borrower stopped paying even when positive project cash flows) ― Ability of borrower to refinance debt ― Capital infusion from either borrower or other equity source ― Guarantor’s commitment to project and financial resources 12
Preliminary Analysis for Loan Modification Request (continued) • Step 6: Require Adequate Agreements During Modification • ― Pre-Workout Agreement ― Forbearance Agreement ― Loan Estoppel Certificate ― Detailed Term Sheet for Modification ― Price of Modification or Extension (fees, principal reduction, etc.) ― Other Assurances (guarantor consent) 13
A. Extending the Maturity Date; Extension Options: • Maturity default • ― Borrower must continue to make monthly interest payments ― Each extension should be a limited term (no more than 12 months is recommended) ― Automatic adjustments (clawback) to other terms in the event of any default ― Additional terms for extension: ― Increased interest rate (immediate or delayed) ― Payment of fees/points ― Additional security and/or collateral ― Additional covenants and performance standards/criteria for borrower 14
A. Extending the Maturity Date; Extension Options (continued): • Payment default • ― Interest-only loans/interest-only periods ― Default in scheduled monthly principal and interest payments ― Unlike a maturity default, the payment default is cash-flow driven therefore short-term solutions such as a reduction in monthly payment amount may make more sense 15
A. Extending the Maturity Date; Extension Options (continued): • Extension Options • ― The borrower’s default may have eliminated any extension terms originally granted in the loan documents ― The completion by borrower of benchmarks upon which extension options may be reinstated ― Additional options may be allowed upon the payment of a pre- determined fee 16
B. Adjusting the Loan Amount: • Lenders are resistant to write down the principal balance • Reliable valuation and income projections required • • Bifurcating the loan – A/B/C Note structures are more common (examples include Note A as the “performing note”, Note B as the “Clawback Note” and Note C as the “Deferral Note”) Temporary adjustments in monthly payment amount by changing the • payment terms are preferred by lenders 17
B. Adjusting the Loan Amount (continued) • Priority Considerations • ― Optional versus obligatory advances ― Junior lienholders ― Intercreditor agreements Equitable Subrogation Considerations • 18
C. Changing the Interest Rate: • Permanent or short-term reduction • Adjustable or fixed rate • • Increased principal payments Payment of fees or points • 19
D. Modifying Payment Provisions: • Reduction of monthly debt payments or forbearance • Useful if collateral is currently generating insufficient cash flow, but • improvement is anticipated Reduced payment terms should operate for a limited period of time, the • original (or better) loan terms should then be reinstated 20
D. Modifying Payment Provisions (continued): • The lender can offset reduced payments by: • ― Providing for a proportionate increase in the interest rate at the end of the reduced payment period ― Negatively amortize the loan on a monthly basis in the amount by which the original payments exceed the reduced payments ― Requiring additional security/collateral ― Taking an equity position in the property 21
E. Adding or Releasing Collateral Securing the Loan: • Adding new guarantors • Requiring guarantors to provide collateral to secure their obligations • • Releasing of portions of the collateral (pad sites) for sale to tenants and using the proceeds to pay down the loan • Additional collateral 22
• F. Modifying Disbursement Provisions to Restart Construction Project: • Special Problems with Construction Loans: ― Realizing repayment from an unfinished project is limited ― Sale of collateral will generate partial repayment at best ― If guarantor is not financially sound, prospects of repayment are further diminished ― Third parties such as contractors and future tenants can file liens and institute proceedings affecting the project ― Permanent lender will cancel its commitment upon default ― Default under such loans can be due to many sources, such as cost overruns, poor construction management, poor design, poor project budgeting, force majeure events, inability to secure permanent financing, inadequate rental or sale market for product being constructed, etc. • 23
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